When selling real estate in America, you can either sell the property and pay taxes on the capital gain (i.e. profit)
or you can
defer the taxes by rolling all of the proceeds of the sale into a
different property, which will be considered to have the same basis* (bookkeeping value) as the property you just sold. Doing this is called a 'Section 1031 Exchange' ('1031' for short), as the rules governing it are found in IRS Code section 1031. The details of those rules aren't important for this post; I'm going to try and figure out how differently things would end up in doing a 1031 exchange versus not doing one.
There are going to be a lot of assumptions in this one, so buckle up.
* The basis is the amount you bought a thing for, but it can be adjusted over time by depreciation, capital improvements, etc.
THE SCENARIO... Read more...
